Thread by @SecretCapital_

Thread on the simple & concise piece 'Under the Hood: The Merchant Payment Process'

It explains the payment process step by step, from the moment of payment to end settlement.

linkedin.com/pulse/under-ho…

Step 1: payment initiation: when paying for a product, the overall goal of credit cards is needing to prove you’re the cardholder. And then prove you have the funds to carry out that transaction.

Step 2: payment method verification and routing via Merchant Acquirer

Once you enter your PIN and information, the payment request is sent to the customer’s bank to continue the authorization process.

Step 3: Authorization Routing via Network

Once the merchant acquirer bank does initial validation checks, the authorization request is handed over to the network specified on the card (ex: Visa/Mastercard). Each network is connected with different merchant acquiring services

so in-store or online portals know where to route requests to once details have been validated and submitted.

After the request is received from the merchant acquiring service, the network will route the request to the customer’s bank for authorization.

Step 4: Authorization Routing and Stand in via Payment Processor (PP)

Often at the stage between the network & the bank issuing the card, there is a payment processor. These provide initial fraud checks on merchants and provide authorization on behalf in case the bank’s systems

are inaccessible.

So the network will send the authorization messages to the PP first, who performs some initial checks (ex: some PPs reject payments from gambling institutes), and then forwards the message to the core banking system of the customer’s bank.

Step 5: authorization decision within core banking

Here, authorization for the payment is given or denied and then flows back to the merchant where it pops up on the merchant’s terminal as ‘accepted’ or ‘declined’. There’s many steps for the bank to go through here, such as

account status, available balance, scanning for risky merchants & suspicious amounts.

Step 6 and 7: core banking routes decision back to PP and to the networks (V/MA)

The authorization response from the bank goes back to the payment processor who then routes this message

back to the network.

Step 8: Network sends this response back to the merchant acquirer

Step 9: Merchant terminal displays authorization response message

If the ‘approved’ message comes, the merchant knows the customer has the means to pay. If there is a ‘declined/error’

message, it’s because one of the checks in Step 5 failed or a timeout/connection issue.

Steps 10,11,12,13: it can take a few days for a merchant payout to be complete.

Presentment: at the of the day, the merchant acquiring service is programmed to send the list of authorized

transactions to the relevant networks. The networks aggregate this data and create a ‘presentment’ file for each bank. The issuing banks will then take the amounts from the customer’s account.

Settlement: the issuing bank makes the bulk payment to the network’s account.

The network will receive multiple bulk payments from the issuing banks. Once payment is received, the network will then work out how much needs to be paid to the merchant’s bank based on the initial set of transactions sent from merchant acquirers.

The flow is now complete, money has left the customer’s account and arrived in the merchant’s account. Consider that Visa cardholders alone accounted for 185B transactions in 2019.

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